Thursday, December 24, 2009

Obama Homeowner Rescue Plan A Bust

The Obama administration's $75 billion program to help homeowners escape foreclosure is a failure and should be scrapped. By unintentional consequences, the government itself under the FDIC sabotages the program.

The irony of this is that a private non-profit company exists that has a proven track record helping homeowners renegotiate mortgages they can afford -- for free.

Bear with me as we go through this one step at a time.

About 40% of the mortgages in which banks voluntarily lowered the monthly payments by 20% were delinquent in less than a year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision reports.

Since March when the Obama program began, 760,000 homeowners were offered loan modifications but only 31,000 were eligible. Of those, only 781 (less than 1%) were determined permanently enrolled. Those were "qualified" homeowners defined as having made at least one in three consecutive payments on time.

Nationally, 14% of homeowners with mortgages are either behind on their payments or in foreclosure.

Certainly, the basic problem is homeowners caught in the jaws of a recession and unemployment. "Even if you've gone through a modification, your situation may deteriorate," said Fred Phillips-Patrick, director for credit policy at the thrift office.

Part of the reason for the poor showing is that mortgage servicers don't  have adequate staff and systems to process the increasing number trial plans. Another reason is that the banks had no business "giving" homes to people with questionable credit or in some cases not even jobs.

 Enter the FDIC. The Federal Deposit Insurance Corp. is going broke. It insures consumer savings accounts in banks and takes over banks that fail and sells them to competitors deemed more financially stable. It is supposed to be self-supporting by assessing a fee on banks for its insurance fund. One of its bad management policies was not tapping wealthy banks any levy whatsoever, a policy Congress changed in 2006. When the housing market collapsed because of subprime and predatory lender practices, it had in reserves only $583 million for failed banks. It was forced to secure a $500 billion line of credit from Treasury and stuck taxpayers a bill analysts say will never be repaid. As of June 30, FDIC reported its insurance fund assets exceeded liabilities by $10.4 billion, about 0.22% of insured deposits. So far this year, 94 banks have been shut, the fastest pace in almost two decades. The FDIC said 416 banks were on its “problem” list, a 15-year high, as of June 30. That was up from 305 three months earlier.

What is overlooked although reported on the FDIC website is the sweetheart deals they make to banks they lure to takeover failed ones.

A classic is OneWest Bank which took over IndyMac Bank in March 2009. OneWest purchased all current residential mortgages at 70% par value. FDIC guaranteed anywhere from 80-95% from any losses OneWest might occur based on the original outstanding loan balance.

For example, if a home has a loan amount of $500,000, One West would pay $350,000. If the owner is offered $250,000 cash in a "short sale," OneWest can report a $250,000 loss based on the original loan and receive a check from Uncle Same for $200,000. Add that to the $250,000 "short sale" price offer and OneWest earns a grand total of $450,000 and a nifty 100 grand profit.

A short sale is when a home is sold for less than its outstanding mortgage. Since September 2008 short sales have increased 22%.

Bottom line: The FDIC in its shared loan agreements with some 50 banks unwittingly encourages them to foreclose on homeowners because it is more profitable, less risky and rids the banks they consider deadbeats.

That's not all. Banks which are making a serious effort to loan say regulators -- another arm of our government -- have reversed course since the market collapse and made borrowing more difficult by insisting on larger reserves and higher collateral and credit ratings from consumers.

In researching this article, I learned from a Realtor about The Neighborhood Assistance Corporation of America, a non-profit advocacy group for homeowners who fall victim to subprime and predatory lenders. I can't vouch for them but they seem to be one solution to a problem the Obama administration is trying to fix with its $75 million homeowners assistance program.

According to its website:

The NACA solution is to restructure the existing mortgage by permanently reducing the interest rate to achieve an affordable mortgage payment. A mortgage restructure is not a refinance that requires eligibility for a new loan (i.e. high credit scores, high property values, etc). Since a restructure reduces either or both the interest rate and/or mortgage principal on the existing first mortgage, there are no mortgage criteria eligibility restrictions. If the homeowner is unemployed NACA provides a forbearance with a minimum payment until that have steady income to have their mortgage restructured.

... NACA has legally binding agreements with all the major lenders/servicers covering over 90% of homeowners to achieve to a restructure or forbearance and is advocating against others. All of NACA’s services are free. NACA also provides for free a forensic audit to determine any violations in obtaining your current mortgage. 

The group, formed in 1988, claims it has negotiated more than $10 billion in loan commitments and guarantees.

Based on the government's record of helping just 781 out of 31,000 problem mortgages, I would think NACA's  proven success is worth a shot at tackling the problem and one helluva lot cheaper.

It is one of those scenarios where the private sector, not the government, can do a better job.

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